Building blocks

PENNY WISE

Construction firm Simplex Concrete Piles (India) was set up in 1924 by H P Lancaster of the United Kingdom and was taken over by the Mundhra family in 1947.

Major projects carried out by the company - which competes with IVRCL Infrastructures & Projects and Nagarjuna Construction - include the country's first steel plant in Jamshedpur, Howrah Bridge and Reliance Industries' oil plant in Jamnagar.

The construction sector is expected to flourish as the government's investment in the infrastructure segment is expected to reach Rs 2,58,654 crore as per the Tenth Plan (2003-07).

Simplex will a beneficiary. According to Amitabh Mundhra, director, Simplex, this is just the beginning of the upturn. "The boom will happen when the work in the market will supersede capacity," he says.

Financially viable
The company's financials look strong. It's third-quarter net grew 336 per cent to Rs 9.73 crore on the back of a 71.5 per cent rise in sales to Rs 261.35 crore.

Operating margins were up 96 basis points to 8 per cent while net margins rose 225 basis points to 3.7. For the nine months ended December 31, 2004, Simplex posted sales of Rs 673.81 crore, up 47.77 per cent. 
 

Financials
(In Rs crore)	9 months ended Dec 31, 2004
Net sales	673.81
Sales growth (%)	47.77
Operating profit	43.04
Operating profit growth (%)	41.91
OPM (%)	6.39
Net profit	12.35
Net profit growth (%)	140.74
NPM (%)	1.83
EPS (Rs)	16.80
P/E FY05 (x)	12.50
P/E FY06 (x)	9.50
RoCE (%) *	12.04
RoE (%) *	11.42
Capital-output ratio*	2.06
* Figures for the year ended March 31, 2004 compared with the year-ago period.

This surpassed sales for the whole of FY04.

Looking forward
The company expects its revenues to touch Rs 1,000 crore by the end of FY05. Net margins are expected to remain stable at 3-5 per cent, according to an analyst.

The company plans to focus on BOT (build, own and transfer where a company enters into a contract with the government, builds a project, owns it for a while and transfers it to the government) projects where margins are much higher.

It also has a strong order-book position of Rs 3,000 crore. The orders - including major ones from Nagarjuna Thermal Power (Rs 980 crore), Vedanta Aluminium (Rs 300 crore) and Essar Steel (Rs 350 crore) for the construction of a steel plant - are expected to get executed in the next few months to four years. 
 

Order-book position
Projects	Value (Rs crore)
Nagarjuna Thermal Power	980
Essar Steel	350
Roads & bridges	350
Vedanta Aluminium	300
Delhi Metro	195
Kudankulam Nuclear Power	140
Chennai Bypass	200
Qatar Petroleum	110
Others	375
Total	3000

"We expect to maintain a growth of 30 per cent per annum for the next three-five years," says Mundhra. It is also looking overseas (mainly the Middle East) to expand business (it has already procured an order worth Rs 110 crore from Qatar Petroleum). It expects export revenues to form 50 per cent of total sales by FY06.

The stock price has surged 72 per cent to Rs 318 over the last three months. Analysts expect an EPS of Rs 22 for FY05 and Rs 29-30 for FY06, which translate into P/Es of 12.5 and 9.5 times respectively.

Compared to this, Nagarjuna Construction and IVRCL quote at 11 and 9.5 times their FY06 earnings. Considering the growth in the sector, it makes sense to take a look at the stock.

The stock's valuation seems to be on the higher side. It is better to buy at declines.

Not a big deal
NEWS IMPACT

The cabinet decision to raise the limit of foreign direct investment (FDI) in telecom companies to 74 per cent from 49 per cent has come in as a positive for the investment-driven sector.

However, listed companies have hardly reacted to the news. Understandably so. Among the listed players, MTNL, Tata Teleservices Maharashtra (TTML) and VSNL hardly have foreign holdings.

So they always had the route open even within the 49 per cent cap along with the option to raise money from the domestic secondary market. The foreign stake in the other listed player, Bharti Tele-Ventures is around 48 per cent.

However, Bharti has enough internal funds to expand and so do Tata and Reliance. The move, however, gives these players the flexibility to approach foreign investors if needed and offers the sector an impetus to grow. 

Limited stake Foreign holdings in key listed players in the telecom sector as on Dec 31, 2004
Company	Foreign stake (%)
Bharti Tele-Ventures	47.84
MTNL	21.53
VSNL	13.82
TTML	0.38

The next round of re-rating in telecom, if at all, will be driven by consolidation in the sector and listings of new players.

That leaves us with the unlisted players of which Idea Cellular is expected to be the major beneficiary.

The move will benefit Idea in a big way since the foreign stake in the company is already 47 per cent. With the cap being raised, the Tata and Birla groups can now exit Idea Cellular.

Earlier, Singapore Technologies Telemedia and Telekom Malaysia bought over a 47 per cent stake in Idea from AT&T.

BPL and Aircel are the other players who are likely to benefit since they can hope to compete with larger and stronger players or sell out. The Sterling group, which owns Aircel, is already in talks with a Russian player to sell its stake.

The higher limit will now enable Idea to increase its footprint in India. Smaller players like Spice and Shyam Telecom, too, would benefit.

However, analysts believe that this is a good time for smaller players to sell out.

For Pradeep Chokani, head of research, Angel broking, small is always beautiful.

After all he has been a avid tracker of mid-cap and small-cap stocks. In a market that is scaling new highs every day, it is not an easy task to find stocks that are safe and yet have the potential to rise. Chokani has a tip: Shasun Chemicals & Drugs.

An early entrant into the contract manufacturing space, Shasun Chemicals is diversifying its product and clientele base. Further, it plans to move up the value chain, making a foray into the CRAMS (contract research and manufacturing services) segment.

Strong relationships forged by the company in its traditional business would help it boost its growth prospectus in CRAMS. Robust growth on the back of strong performance from CRAMS and new product launches in US markets would aid performance.

The stock trades at Rs 382. And Chokani has a medium-term target of Rs 468. Go ahead, catch that 22 per cent gain.